Being a contrarian investor is easy, just find some stock ideas that are not popular. Doing it successfully is not so easy! I have been doing my own little experiments lately and getting some indication of investor sentiment anecdotally with a very small sample set, and I don’t think my boring investment style is that interesting right now in a raging bull market.
Not so sure a “hated bull market” is a good description anymore. I get the feeling many are enjoying it now and will fall asleep reading my suggestions below, and fall into a dream about the latest likely ten bagger mentioned on hotcopper. The ideas below will be about as popular as Crown Lagers among a selection of craft beers at a gathering of hipsters.
These two LICs have frustrated plenty of investors over the last year or two, and somehow I have ended up buying them in the last month or so. I wouldn’t be surprised if I get some comments that these ideas are a bit crazy, but on balance I would treat such a reaction as giving me more confidence they might work out!
As usual this is not financial advice so DYOR and don’t blindly copy these suggestions, having said that they are so unpopular no one probably will anyway!
ALI – ARGO GLOBAL LISTED INFRASTRUCTURE LIMITED
Firstly, I want to make it clear I am not overly critical of the Argo Investment Company, they have held a well-deserved excellent reputation for providing a low cost LIC which has delivered steady performance for decades in ARG. A great alternative to many expensive index hugging managers in the Australian equity market.
Many investors though seemingly have doubts about a more recent LIC, the Argo Global Infrastructure Limited LIC (ALI). ALI is much smaller than ARG, meaning that I overall judge Argo mainly on delivering a good product for investors via ARG.
I found it interesting that one of the more well-known fans of Argo, Scott Pape the barefoot Investor, couldn’t get very excited about ALI. Even one of the directors whom he spoke to didn’t seem overly excited in this interview.
I am guessing nonetheless that many long-term holders of ARG would have happily parted with some funds to take advantage of their priority allocation. The great reputation and trust many have in Argo made it quite easier for them to raise plenty of funds for such a product. Perhaps many wouldn’t have even closely examined the fee structure? It was done at an opportune time with the LIC market having recovered to be very buoyant, and many private investors searching for offshore exposure to help with diversification. It provides Argo with a steady amount of management fees, with perhaps not a huge amount of ongoing effort required, but does it offer the investor who participated in the IPO anything special?
I will briefly list some doubts over this LIC.
Whilst I don’t mind seeing no performance fees, the base management fee is 1.2%. They are certainly not the most expensive in the market, but what I found unusual was the breakdown of such fees.
WHERE DO THE FEES GO?
From my understanding, I hope to be quickly corrected if I am wrong, is that the “portfolio manager” is Cohen & Steers Capital Management. The “manager” in this case is Argo. So Argo appoint Cohen & Steers, who make the investments of the portfolio and advise Argo of how things are going.
Cohen & Steers and Argo share the fees that come out of the company on a 50/50 basis. Sound fair?
In fairness I think it may not be that easy for us small Australian investors to access Cohen & Steers funds at better than the 1.2% fee, but I think a similar Closed End Fund exists on an offshore exchange. So I have no objective with Argo getting an ongoing slice, even if it shouldn’t take an excessive amount of work for them once it is up and running. I just have some doubts whether taking half leaves enough room for the end investors in ALI to get a good result overall.
WHAT DO ARGO DO?
Argo have appointed the portfolio manager being Cohen & Steers. Argo will have to monitor and supervise how C&S are going as portfolio managers on behalf of shareholders, and decide whether this relationship is best to be continued with in the future. They manage the general affairs of the company, and also adminstration etc.
ARG is renowned for lean fees, so I was surprised to see the Argo name being put to a product where the fee structure is of this nature.
I think the Contango global LIC may have a kind of fee arrangement not too dissimilar. Regular readers of this blog may get the impression I don’t rate Contango as world beaters with corporate governance matters. Argo as I have pointed out have a well earnt good reputation in this regard though to date.
DISCOUNT TO NTA BUT HOW MANY SHARES HAVE BEEN BOUGHT BACK?
A modest buyback has recently been announced, 5% where often 10% is used by other companies. But is this a “Clayton’s” buyback? Sorry for my Gen Y audience they may need to read the following when I refer to Clayton’s.
A LARGE DISCOUNT TO NTA, AN OPPORTUNITY FOR MANAGEMENT TO PUT MORE SKIN IN THE GAME?
In the last Annual Report, I only saw director’s holdings in the stock that I struggle to describe as more than “modest” exposures. At the time of writing I have only just very recently noticed them buying more. This is mildly encouraging but the purchases are more of the amounts a mug punter like myself may buy occasionally. For this type of LIC structure I was surprised to see the amounts of director’s fees in total that were paid. I can vaguely recall the company remarking that the discount to NTA represents an attractive way to invest in ALI for other investors, but how about themselves?
ARG has a large stake already, but not so large from the perspective of the overall fund size of ARG. Is the stake held because they are true believers in ALI, or for other reasons?
PERFORMANCE AS A LIC
Looking at the latest NTA report at the time of writing, it shows performance of 4.9% per annum versus their benchmark at 8.6% per annum.
LONGER TERM PERFORMANCE
In fairness to the product, I fully accept that the record as a LIC is too short to make too many judgements regarding the investing performance of the portfolio. From what I have read, I do regard C&S as quite a capable manager in this specialised space. There appears to be enough historical evidence that C&S can add alpha within their categories even after fees. Of course, we can’t be sure of this continuing in the future. History can be a useful guide, but achieving outperformance as an investor in ALI would be easier without Argo receiving the extent of fees they do. And it doesn’t appear to me that C&S are hugely active investors, so I am also a little sceptical regarding fees in the context of their bets versus the benchmark.
WHY ON EARTH WOULD I OWN THE STOCK THEN?
Well these types of discounts to NTA are rare these days, and were it to widen I suspect eventually the modest share buyback will provide a little bit of support.
I also watch as an outsider in the situation going on with WDE. We saw Wilson buy a substantial stake, and only AFTER this occurred, Perennial are increasing their stake and causing some competitive buying that has reduced the discount to NTA. Could there be some parallels there? As I write there is not a known activist with a substantial stake in ALI. Yet with the IMA as it is, a large discount, a liquid portfolio, I could see the temptations from some perhaps.
I have observed a closed end fund from Cohen & Steers that looks quite similar to ALI, which normally trades at under a 10% discount and the expense ratios do not look much different. If this is correct than ALI shares (when they traded at a 15% discount to NTA where I estimated I purchased) may stack up ok on a relative comparison.
What is far more important of course is ultimately where the NTA goes from here. This sector has been very boring as the global bull market has been in full swing this year, meaning it is one of the few relatively depressed areas. If the global economy does suffer some unexpected jitters, it wouldn’t shock me to see a few tailwinds for the ALI portfolio. That may consist of a falling AUD, falling bond yields, and a pickup in relative demand for perceived defensive stocks.
In some of the quarterly commentaries I have observed the lacklustre oil price has been a bit of a headwind for some of their stock exposures. I don’t mind an investment where an improvement in oil prices may act as a small tailwind. When reading headlines about “the everything bubble”, this type of exposure doesn’t seem all that popular right now but could change.
If I am wrong on the above then it is possible the unusual structure of ALI may not be that sustainable. I am not convinced Argo can necessarily keep the IMA structure the same in the medium term to longer term, should other shareholders be frustrated with the performance. Large cuts to either the fees Argo get, or C&S or both may deliver a product that can better deliver good results for shareholders. If that doesn’t reduce the discount to NTA, a sizeable off market share buyback could be used given the LIC still would have the scale to cope with admin costs even if it is smaller.
Common sense would hopefully see Argo address some of the issues themselves, but common sense is not so common these days and sometimes management are slow to act and leave it to others. I have been encouraged by some in the investment management industry who have taken the initiative to cut their own management fee income in recent times.
C&S look like a capable manager but having a somewhat lean run, they could easily turn things around in my opinion. If there is not much change to the overall structure of ALI, although I don’t agree the fees should be as high as they are, they are at a level that I can still tolerate when entering at a discount to NTA of about 15%.
As usual I welcome all feedback if any can point out areas where my analysis is off the mark. That is probably the main reason for me blogging after all. It is not a large position for me yet, so I have room to back track if I get convinced from others this sounds like a poor investment.
On a lighter unrelated note, I came across this picture on the net recently and found it amusing.
ALF – AUSTRALIAN LEADERS FUND LIMITED
I am limited in time on writing about ALF but thought I would mention I bought some recently. I haven’t timed it well and they have eased a little since, although with ALI they gained so in broad terms these two are kind of at levels I have bought as I write now.
In referring back to the contrarian theme, I have found it interesting observing some of the frustrated investors on the hotcopper forum about ALF. Regarding this I would like to point out the following.
- If you bought ALF shares, surely they are the type of investment to give them a full cycle to judge them? I mean including a down market (yes down markets are not extinct yet).
- Many excellent investors have very long periods where they can underperform benchmarks considerably. You can even find long stretches where Warren Buffett looks very ordinary. (before you point it out, I am quite aware Justin Braitling is not Warren Buffett!).
- If you bought ALF shares, did you pay an excessive premium to NTA, e.g. 20% plus?
In conclusion, if an investor has given ALF a reasonable timeframe and paid a sensible price in relation to NTA, I would be surprised if they are tearing their hair out on hotcopper. I don’t recommend forums to copy stock picks whether it be tips to buy or sell, but must concede sometimes in certain stocks you can smell a sense of capitulation in postings. I normally see this in beaten down companies in the resources sector where I hunt for shell companies trading at less than cash. Sometimes investors are happy to sell a stock at a 30% discount to cash because the management doesn’t plan to try and turn the shell into a 10 bagger. The burnt investors want the ten bagger because of the anchoring bias, i.e. they must get back past losses in the same stock for some reason.
Anyway I digress! I suppose an element of this purchase is the contrarian streak running through me, let’s see how it goes.
I shall finish with the long-term performance numbers of ALF since inception after fees, under the guidance of Justin Braitling (who is no Warren Buffett but I am happy to back for now to turn things around one day). Am also guessing Geoff Wilson might have some faith, students of the history of LICs would be aware of the early link between the two at the start of this LIC, and there is a link still today.
Below is to September 30th. As I write the latest isn’t available and I am fully aware October was a Barry Crocker, but won’t change the message that long-term numbers the product has been successful in regards to the message they are selling.
Source: NTA report released on October 13th.